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All QE is ""people's QE" - just not the right people

There is a widespread belief that the Bank of England’s QE only
benefited banks. Promoters of Jeremy Corbyn’s “People’s QE” use the strapline
“QE for the people, not for banks”, and describe conventional QE as “bankers’
QE”.

So is this true? Did QE primarily benefit banks?

The Bank of England’s QE programme did not purchase gilts
directly from banks, but from non-banks – pension funds, insurance companies,
asset managers, high net worth individuals. However, because the Bank of
England does not deal directly with non-banks, banks intermediated QE
purchases. Banks bought gilts from investors, and sold those gilts to the Bank
of England. Customer deposits increased as a consequence of the banks’ gilt
purchases: bank reserves increased as a consequence of the banks’ gilt sales.
The end result was a vast increase in both base money M0 (bank reserves) and
broad money M1 (customer deposits).

Because QE has vastly increased bank reserves, many people are
angry that banks have cut back lending severely since the 2008 financial
crisis. What is the point of giving banks all this money if they don’t lend it
out? But banksdon’t lend out reserves. Theydon’t lend out customer
deposits,
either. Throwing money at banks doesn’t make them lend. The extra money that
landed on bank balance sheets left them with far more reserves than they needed
to settle payments, but made no difference to lending.

The Bank of Englandpays interest on reservesat base rate ("bank rate"), currently 0.5%. Some
people say that this is in effect paying banks not to lend, and blame this payment
for the fall in bank lending. But this is mistaken. Banks collectively have no
choice but to hold the extra reserves created by the Bank of England through
QE. When investors spend the proceeds of QE on other assets, such as corporate
bonds, equities and commodities, the money simply moves from one bank to
another. QE money does not leave the banking system unless it is converted into
physical notes & coins.

But do banks benefit from interest on reserves? Slightly, since
they pay less than 0.5% on demand deposits. But against this should be set the
opportunity cost. If they did not hold so many reserves, what would they hold
instead?

Banks must hold sufficient safe liquid assets to meet liquidity
buffer requirements, which have increased considerably since 2008. The safest
and most liquid assets are reserves, but there are substitutes such as Treasury
bills and gilts. Banks' holdings of gilts have actually risen since 2008.

But for banks to earn money, they must do riskier lending. A few
basis points spread between customer deposits and reserves or T-bills isn’t
going to satisfy their shareholders. Far from discouraging risky lending,
therefore, the presence of excess low-earning assets on bank balance sheets
should encourage it. If banks aren’t lending, therefore, other factors are at
play – such as depressed consumer demand and a very large private sector debt
overhang.

The main effects of QE are to support asset prices and depress
longer- term interest rates. So banks with balance sheets stuffed full of
poorly-performing loans collateralised by risky assets undoubtedly benefited
from QE, because it prevented wholesale destruction of their balance sheets
through sharply falling asset prices and swathes of household and corporate
bankruptcies. But although QE helped keep banks alive, it has made it far more
difficult for them to return to profit. When interest rates are close to zero
and yield curves are flat, banks can’t make money.

All in all, it is hard to see that QE could fairly be described
as “QE for banks”. But if banks were not the main beneficiaries, who were? In
2013, the Bank of Englandadmitted thatthe principal beneficiaries were asset holders, particularly
those in the top 5% of the income distribution:

By pushing up a range of asset prices, asset purchases have
boosted the value of households’ financial wealth held outside pension funds,
but holdings are heavily skewed with the top 5% of households holding 40% of
these assets.

Rich people, in other words. So conventional QE is QE “for the
people”. Just not the people that Jeremy Corbyn would like to help.

Of course the Bank of England argued that conventional QE
actually benefited everyone:

Without the Bank’s asset purchases, most people in the United
Kingdom would have been worse off. Economic growth would have been lower.
Unemployment would have been higher. Many more companies would have gone out of
business. This would have had a significant detrimental impact on savers and
pensioners along with every other group in our society. All assessments of the
effect of asset purchases must be seen in that light.

Those who suffered years of unemployment, under-employment and
depressed real incomes might regard this as cold comfort. Would direct
reflation of the economy through amodern Debt Jubilee, “helicopter money”, and/or a money-financed
investment programme have worked better? I am one of many who think that it
would. When asset prices are in freefall and the economy is collapsing,
conventional QE works: but when the problem is lack of demand due to damaged
bank and household balance sheets, conventional QE is inadequate.

We have relied far too much on conventional QE. Whether it has
helped restore the UK’s fortunes we do not know. But we do know that further
reflation of the economy is not at present needed: the debate at the moment is
when to raise interest rates, not whether to do more QE. We need investment,
yes, but while interest rates remain low we can have thisthrough conventional bond
financingat little cost. To my mind the attention of the
new Labour leadership should be elsewhere.

For too long we have turned a blind eye to QE's regressive
nature. Surely the top priority now must be to address the inequality that
"QE for the rich" has helped to cause.

Comments

Spot on. It was far better to make sure banks survived than to suffer the acute pain of any further collapses for all of us. But we could have found much better ways of using £375 billion. Investment in a move to a low energy economy would have permanently helped the balance of payments and reduced the cost base for UK industry thus helping industry, workers and the planet. Investment in productive infrastructure would also have done a lot of good. But we do have to be careful about at what point in the cycle quantitative easing is used. When you do it is a matter of skilful judgement of need. How you do it should also have been a matter of skill and judgement. It got derailed by an ideology that says only the free market can ever know what is best.

Quite. Which raises the question: why spend so much that rich people then have more money than they want, and thus have to be paid interest to induce them not to spend too much? I.e. why have a nation debt at all? Milton Friedman said don't have one, and Warren Mosler likewise.

I agree almost completely, except when you say "QE money does not leave the banking system unless it is converted into physical notes & coins." well, I can imagine a series of decision that increase GDP without necessity of paying in money & coins. For example, a new credit to public sector to building a motorway. That will origins a chain of expenditure from government to consumption of the later employee through banking account without physical money. I coincide in it is the credit that mobilize monetary base, but in don't see the necessity of physical money.

What I said is entirely correct. QE money does not leave the banking system. Even if it were spent on infrastructure development it still would simply move from one bank to another. I agree with you totally that spending the money on productive investments such as motorways would probably increase GDP far more than spending the money on unproductive investments such as secondary market corporate bonds.

I agree entirely! What tends to be overlooked also is that not all assets and liabilities are equal. Bank reserves are effectively super-senior, now interest bearing, capital claims on the central bank. By contrast, demand deposits are deeply subordinated to derivatives and bail in workouts. And even richer, they now wish to close the door to the prole's access to central bank counterparties, I.e. Banknotes. Priceless!

Hang on, hang on. You are mixing up assets and liabilities. Bank reserves are assets. Demand deposits are liabilities. They are senior debt and certainly aren't "subordinated to derivatives", which are off balance sheet contingent liabilities. They are, however, junior to secured debt such as covered bonds and repos.

Hi, Frances I'm clear on balance sheet assets and liabilities. What I note is that bank liabilities such as deposits are properly unsecured creditors that are vulnerable to bail-ins. Referring back to your "premier league" piece, the M3 is effectively unsecured and vulnerable to insolvency workouts, while M0 is super-senior central bank liabilities. In short, commercial banks go insolvent, and the central bank never does.

The CB emits super senior capital into the banks, while nonbank actors are left with unsecured claims in lieu of their once senior treasury debt. The banking system absorbs senior assets and emits unsecured funding. This is, of sorts, a funding mismatch - the public is left with more net risk, I.e. more unsecured, fewer secured cash assets. This problem would worsen if banknotes were eliminated for the public.

Re derivatives, I only see the status of bank depositors as being unsecured. As such, I can only presume that a severely impacted balance sheet could and would claim bank deposits as part of a bail in. I'm not certain that a contingent-derivative-led insolvency would would leave bank deposit liabilities untouched.

This is very muddled. There is nothing to stop people keeping savings in the form of 100% guaranteed Treasury debt if they so choose. They are not compelled to keep savings in banks in excess of the guarantee limit, and if they choose to do so they are indeed putting their savings at risk. But it is their choice.

You seem to think that there used to be an unlimited Treasury guarantee for bank deposits which has somehow been revoked. There never has been.

Reserves in banks are needed to settle payments - ie to support flows, not stocks. Of course they are 100% guaranteed. If they were not, the payment system would be unstable, and that is the lifeblood of the economy.

We need public investment not just as a reflationary mechanism - and if not needed for that now it might soon be again - but also to fill gaps left by the private sector: housing, infrastructure, environment, skills, etc. The PQE debate has focused too much on funding and not enough on the investment itself, which will be needed in good times as well as bad.

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